When a Penny Is a Nickel
A dramatic drop in prices has put US officials on alert to the risk of a weak economy becoming stuck in a downward spiral known as deflation.Skip to next paragraph
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Japan knows deflation well, and hasn't beat it for eight years; Europe may be heading for the same quicksand of uncontrollable price declines.
Any American who lived during the Great Depression saw firsthand the difficulty of reviving an economy in which not enough people spend money because everyone is waiting for prices to drop even more.
It's an Alice-in-Wonderland experience in which consumers and businesses think they are benefiting when they're really not.
Unlike inflation, which can be curbed with such government tools as interest-rate hikes, deflation has a mental aspect among consumers that government can't easily influence.
That's why many economists want the Federal Reserve and Treasury Department to do what they can now - even though US officials say rampant deflation remains a remote possibility.
The Fed has already cut interest rates to a 41-year low. But one other way to avoid this economic flytrap is to make imports more expensive by letting the value of the dollar slowly decline. Pricier imports would help reinflate the economy.
So it's significant that Treasury Secretary John Snow seemed to suggest over the weekend that the US wouldn't try to talk up a strong dollar against other currencies. The dollar has already weakened over the past year, and Mr. Snow may be signaling that a further decline may be needed soon.
Weakening the dollar was a strategy that helped end deflation in the depression. But doing so now in a global economy - and one in a slump - carries the risk of also triggering deflation in Europe and Japan.
With US consumer confidence on the rise, deflation may not be at the door. But officials still need to keep up enough fences to block it.